David Brickman Takes Over as Head of Multifamily at Freddie Mac

By Keat Foong, Executive Editor

Washington, D.C.—David Brickman was named senior vice president, multifamily, at Freddie Mac in June, succeeding Michael May. Brickman’s responsibilities include overseeing customer relations, product development, marketing, sales, loan purchase, asset management, capital markets and securitization for the company’s multifamily business.

Brickman, who has been at Freddie Mac since 1999, holds a Ph.D. in economics and real estate from the Massachusetts Institute of Technology and a master’s degree in public policy from Harvard University. Keat Foong, executive editor, MHN, interviews Brickman, who lends his thoughts on a number of topics, from where Freddie Mac’s multifamily division should be headed to the health of the apartment industry.

What are your plans for Freddie Mac’s multifamily division?

The first and most important plan is to keep the momentum going. We have a fantastic business. Things are going very well for us, and I want to keep the train on its tracks and not lose that momentum as we continue to grow, in terms of our volume and overall financing activity, as we return to a healthier level of market activity post-recession.

At the same time, I do think there are things that we can continue to improve. I view much of my focus to be on incremental improvements. It is not the most glamorous to talk about, but making ours a more effective organization involves taking a hard look at and improving our processes, our technology and our ability to be a state-of-the-art mortgage processing organization. I would like to see that when borrowers and mortgage bankers work with us, they think, “Freddie Mac has really got it down as far as their ability to process business, to be responsive and to be effective in terms of how they do their business.”

The third area of our focus is to continue the transformation that we began two to three years ago in converting from being a buy-and-hold portfolio lender to a securitization shop, and to really continue to reinvent not just who we are but also how securitization is done. We think we have brought significant innovation to the securitization space through our [K-Certificate] deals and CME mortgage products. We seek to continue to enhance that securitization execution so that we are able to blend the best of both worlds in terms of our ability to offer a greater degree of customization to be more customer- and borrower-oriented, and yet provide the execution and standardization that we are able to achieve through securitization.

How are you improving efficiencies at Freddie Mac?

A good example lies in our early-rate-lock process. Before the crisis, as much as 60 percent or so of our business was executed via early rate lock. That program provides significant value to borrowers who are looking to lock in their borrowing rate while continuing to work through the due diligence process. Certainly, in a very low-interest environment, that early-rate-lock has a lot of value. In more recent years, the percentage of our business that has been early-rate-locked has dropped precipitously for a number of reasons, some due to our process, some to broader economic issues. As far as our processes, we are taking a hard look at how we can increase the amount of early-rate-lock business in the future. We think there is a lot of demand for early-rate-lock that we’ll be better able to meet if we have a more efficient process.

What limits exist regarding how much financing Freddie Mac can advance in the multifamily market?

There is no limit placed upon us by any external body. We have no capital budget from which we need to work. The constraints that are on us are almost entirely economic as far as the demand for financing and our ability to execute efficiently at an economically sound level. We are not going to execute business if we cannot do it in a way that a prudent investor would. So there will be times when there are other investors in the marketplace who are more aggressive than we are. There are also times when our execution may work better. There is no limit on our volume other than that we, like any sound business, look to ensure we are able to generate appropriate returns and stay squarely within our credit parameters.

What has been happening to spreads for Freddie Mac on the multifamily side?

They are changing from minute to minute these days. We have seen significant volatility in the capital markets that is really reminiscent of the financial crisis. The widening in spreads was most precipitous in the days immediately following the S&P credit rating downgrade of the U.S. government. After having moved during that week after the downgrade, our spreads have been steady since then, though we are still in a relatively volatile market environment. Right now, there is a reasonable possibility they will contract if we see continued stability and some broader market rally, so stay tuned. We probably are more confident [than in previous crises] of our ability to stay relatively stable in terms of our spreads. They have moved up in concert with broader credit spreads, but less so than most other comparable mortgage or credit spreads or indices. We have been extremely pleased with the performance of our securities. This has really made a very strong statement about the value of the structure of our securities, and that in turn has enabled us to be more stable in terms of the mortgage spreads that we have been able to offer to our borrowers.

How about overall interest rates for Freddie Mac multi-housing loans?

Interest rates went down significantly, especially in the weeks immediately preceding the S&P downgrade and then immediately after the S&P downgrade. We saw 10-year Treasury rates dipping under 2 percent. You saw fairly significant reduction in interest rates, so even with our increase in spreads, the total mortgage rate available for borrowers declined. That helped fuel some surge in activity, though I think most of the business we’ve seen over the last couple of weeks had largely been in the pipeline for weeks prior to the downgrade. There was an opportunity to lock in a very attractive borrowing rate. We have a reasonable expectation that, in fact, while we are not slow right now—we are extremely busy—we did not get busier in terms of new quoting activity. That has probably more to do with its being the end of August rather than any lack of borrower demand. Barring any major changes, I think we will see a healthy uptick in quoting activity come September.

Has S&P’s recent downgrade of the GSEs’ debt credit ratings had any effect on Freddie Mac’s multi-housing financing?

It has had remarkably little effect on Freddie Mac multifamily. We had in the marketplace our latest securitization K703, and it has been extremely well-received by the market. The underlying senior bonds we issued were rated triple-A. This speaks again to the strength of our security structure. What investors are increasingly coming to realize is that this K-Deal structure that we have developed really provides them with a belt and suspenders: They have the benefit of a genuine triple-A rating based on the collateral independent of the Freddie Mac guarantee, and on top of that they have the benefit of a Freddie Mac guarantee. To the extent that the downgrade only speaks to an issue about the Freddie Mac guarantee, it doesn’t affect the fact that we are achieving a triple-A level independent of that guarantee just based on the collateral. So investors have largely realized [S&P’s downgrade of the GSEs’ credit ratings] does not have a significant effect on the credit quality of the Freddie Mac K-Certificates, and that has been reflected again in this very strong demand that we have seen in the marketplace. That strong demand is what in turn gives us the confidence in the mortgage marketplace to be stable in terms of our pricing of mortgages, knowing that we are not being significantly affected by that downgrade and the implications of it.

There is a lot of talk about how much money Freddie Mac overall is losing or costing taxpayers. Can you comment?

Freddie Mac Multifamily is consistently profitable. Last year we earned the taxpayer indirectly $964 million in the multifamily business. Through the first two quarters of this year, we [made] $559 million [in segment earnings]. So Freddie Mac Multifamily is consistently generating strong profits for Freddie Mac, and ultimately for the U.S. taxpayers, and we have done so throughout the financial crisis and in the post-crisis period. We are a healthy business. We think the returns we generate are appropriate for the business and would be appropriate levels for a private capital investor.

Can borrowers expect any changes in underwriting standards or new products from Freddie Mac in the near future?

We have no intention of changing our underwriting standards. We think we are in a good spot in terms of our underwriting and credit posture. We will not reach in terms of credit to increase business. So if other investors were to choose to become more aggressive in terms of credit, that would not affect our position in the market. We do not see a need to tighten; we do not see a need to loosen. It is an issue of whether if mortgage demand increases, business is going to fall within our credit parameters. In terms of new products, we don’t think we will be introducing any significant new products in the near future, so much as we will be making modest improvements and innovations to existing products to make them more borrower-friendly and accessible. We do work under a directive from our regulator that we not engage in new activities.

Many economists are now saying that the chances for a double-dip recession are higher. What is your view?

I cannot offer you an economic forecast. I would agree with you that the consensus view is that we are looking at slower rates of economic growth in the near term. And certainly there are a number of economists who are suggesting that we are likely to see a double dip. Whatever happens in the macro economy, I think multifamily will fare better than most other asset classes, both in the commercial mortgage space and the broader economy. The reason is that you do see significant positives in the outlook for multifamily, including the broader shift from owned housing to rental housing that has probably not fully run its course. You also had very limited construction of new apartments in most major markets in the past few years, so the increase in demand has not been met by increased supply.

And even though the economy is weak now and obviously can get weaker, we are seeing some positive household formation. This is tied most directly to the economy and will be higher or lower depending on what the economic growth looks like. Anecdotally, a number of our larger borrowers are seeing some reversal of the household contraction that occurred during the recession. The proverbial kids are beginning to move out of the house and find an apartment, and some roommates are deciding they can go and rent an apartment on their own. Household formation is not as robust as you would expect if the economy were creating a large number of jobs, but it is a notable difference from what we were experiencing in 2008-10 when we were actually seeing contraction.

And then superimposed on all of those trends, apartment investors can finance apartments at such attractive low rates. That has a very positive effect in terms of values. So the income side looks good, and the value side looks good. And compared to other asset classes, multifamily comes pretty close to the top. If the economy gets much weaker, that will, all else being equal, take a little of the growth from multifamily as it will from everything else, but I will not change that relative ranking of multifamily.